Modern Portfolio [ Ссылка ]

The essence of Modern Portfolio Theory is to find the efficient portfolio, and findings suggest that it is possible to construct an "efficient frontier", of optimal portfolios that offer the maximum expected return for a given level of risk.

The popular notion is that the higher risk the higher the return, according to which your risk - return equation should look something like this....


In theory if you invest 100% of your investment in bonds you should have the lowest risk and if you invest 100% in stocks you should have the highest risk, which forms a straight line, but practically your risk to reward over the years looks something like this.

Economists thought that if you invest 100% in bonds you have the lowest risk but later they discovered that if you replace some bonds with stocks, you not only reduce risk but also increase return.

An investment portfolio consisting of 75% bonds and 25% stocks should be ideal, which minimizes risk and maximizes return.

Also, when you replace more bonds with stocks you could have more return at the same level of risk.

The efficient frontier is synonymous with the buy-and-hold approach. Today it's very common for an investor to put more than 50% of stocks in their portfolio. In addition, other financial instruments such as Exchange Traded Funds or ETF's are now becoming extremely useful in optimizing portfolios.

But looking at the performance of the stock market from 2001 - 2010 the buy and hold strategy was hardly effective. And this led to many people claiming that they could not rely on the efficient frontier anymore.
So does that mean that the efficient frontier has gone obsolete? Or buy-and-hold strategy is no longer valid?

The efficient frontier is still valid.

In fact, the performance of the stock market from 2010 - 2018 has been nothing short of phenomenal, the growth indicated by S&P 500 index is impressive.

But the real question is how will your buy-and-hold strategy perform when the market goes down again?

The answer is that buy-and-hold strategy alone is not a comprehensive solution. First, you need to develop not only a diversified but an optimally diversified portfolio and second, you need to hedge your portfolio against downward movement of the market.

At SAMT AG we’ve covered both these things, by improving the brilliance of the efficient frontier. We offer a total of 20 risk classes, and diversify portfolio through optimization algorithms.

These algos automatically search for the best combination of ETFs according to risk numbers and yield. We optimize extensively so that no more optimal composition of an ETF portfolio is possible.


And second, to hedge against a down market we use plain-vanilla put options. These options act like an insurance policy for your portfolio, and don't prevent profits of a growing market.

Visit samt.ag to learn more…

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